US contract ops slip backwards
- From: Vol 9, Issue 4 (April 2008)
- Category: General
- Region: Unspecified
- Related Companies: AECOM, American Water, Aquarion, CH2M Hill, GE, Severn Trent Services, Siemens, Southwest Water Company, United Water and Veolia Water
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A dip in design-build revenues in 2007 meant that the ‘big six’ firms posted lower combined turnover than in 2006. A healthy pipeline could reverse the trend in 2008.
US contract operations revenues for the big six companies active in the market were down 2% to $1.44 billion in 2007. The biggest declines, according to data sourced by GWI and Public Works Financing newsletter, were at Veolia Water NA and American Water, where revenues were hit by design-build projects entering the operational phase. Three firms saw revenue increases: United Water’s 16% leap owed much to the purchase of Aquarion Operating Services last summer. Of the companies covered in the survey, Veolia has the largest share of the industrial market ($127 million of revenues in 2007 out of a total of $176 million), and despite a 9% rise in Veolia’s year-on-year revenues from industrial contracts, the historical pattern seems to show that this sector of the market is making little headway (see chart p41). The chart does not reveal the whole picture, however, and the reality is that industrial operators such as GE and Siemens are not represented here due to the fact that they have little if any municipal penetration on the O&M side.
Consolidation in the sector continued in 2007 with United’s takeover of Aquarion Operating Services (though it wisely opted to leave the loss-making contract in Bridgeport, CT in the hands of Kelda). The takeover of Earth Tech by AECOM earlier this year is expected to be followed up by the divestiture of Earth Tech’s contract ops business, which AECOM officials are keen to point out is a profitable enterprise. The current portfolio includes a batch of O&M contracts, as well as facilities procured on a DBFO basis, with references extending from Rhode Island in the east to Beverly Hills in the west.
Veolia Water North America
While Veolia’s big prize last year was at United Water’s cost, it failed to sweep the board in Indianapolis, where it has been operating the water system since 2004. The company had previously announced that it was moving its headquarters to the city, but may now be having second thoughts after failing to snatch the wastewater O&M contract from United Water. Perhaps Milwaukee is next on Veolia’s relocation list – the company’s biggest win saw them undercut the incumbent operator by a daring 20% to end United’s 10-year reign in the city. Apart from the headline $400 million win in Milwaukee, Veolia also made progress on the DBO side last year, winning a contract to extend the surface water treatment plant in Brandon, FL, from 72 MGD (272,500m3/d) to 120 MGD (454,200m3/d). The client is Tampa Bay Water, and the deal is expected to earn Veolia a total of $158.4 million. Veolia has had a positive start to 2008, inking new contracts in Radcliff, KY and New London, CT, worth a cumulative total of $92 million. Bigger opportunities are just around the corner, however – Veolia and CH2M Hill are going head to head for a $115 million 20-year DBO contract to supply a 8 MGD (30,280m3/d) wastewater treatment plant in Spokane, WA, for which proposals had to be submitted by 14 March. A Veolia-led team also had low-bidder status on a new 3.4 MGD (12,900m3/d) MBR facility for the city of Santa Paula, CA, but was pipped to the post on 15 April by a PERC-led team (see PPP tracker p64). Veolia is also likely to have an interest in bidding for the $160 million reverse osmosis plant currently being tendered by the City of Hialeah, FL (see Desalination Tracker p52).
CH2M Hill OMI
The second operator in terms of revenues is CH2M Hill OMI. As a full service engineering, construction and operations company, CH2M Hill OMI is not just interested in operating and managing systems. “Because of the slow growth of the water market, we have decided to provide a full spectrum of services,” says Gary Miller, vice president with the company. “With a possible economic downturn, cities are keen to maximise efficiency.” In addition to O&M contracts, the company earned more than $6 million in new revenue in 2007 for water or wastewater O&M consulting services, covering facility start-up, operator training and asset management. CH2M Hill OMI’s revenues on the contract ops side remained pretty stable last year – in line with the company’s expectations. A healthy run of renewals was complemented by a modest number of new contract wins, including a one- year $4.5 million contract to provide a range of support services for the 72 MGD (272,520m3/d) Yuma desalting plant and associated facilities in Florida. The one-year contract includes an option for four additional years; if all option years are exercised, the contract value could ultimately reach $22.6 million. Since the end of last year, the company has effected a number of key staff changes. Former CH2M Hill OMI president Mark Lasswell has assumed the role of president and group chief executive of CH2M Hill’s Civil Infrastructure Group. In his new role, Lasswell will be responsible for the firm’s transportation and water business groups, as well as O&M activities. Lasswell was succeeded as president of CH2M Hill OMI by Elisa Speranza, who came over from the firm’s water business group.
Excluding the AOS acquisition, which added around $30 million to United Water’s revenue base, organic growth at United last year was a respectable 5%. The company threw a large amount of resources into its renewals programme, and although 13 out of 14 ain’t bad, one major prize got away, as United lost its wastewater O&M contract in Milwaukee to Veolia. EVP Patrick Cairo is philosophical: “Milwaukee went the other way, but they really offered a very attractive price, and the city couldn’t turn away a $7.5 million [annual] price reduction.” United’s other big renewals last year were in Indianapolis and Jersey City, both of which it won, though it only succeeded in negotiating one new contract in 2007 – in DeSoto County, MS. The company’s renewals focus in 2008 will include, among others, the wastewater O&M contract in Gary, Indiana, worth an estimated $10 million in annual revenues.
American Water’s contract ops revenues fell by more than 10% in 2007, from $154.8 million in 2006 to $139 million last year. One of the major drivers behind the drop was the fact that the 80 MGD (303,000m3/d) Lake Pleasant water treatment plant in Phoenix, AZ is now operational. American Water won this project back in 2003 on a DBO basis, and the commissioning of the plant in spring 2007 meant that the hefty design-build revenues of $49.5 million which American logged in 2006 dropped off to $5.2 million last year. Despite no new headline DBOs hitting the tapes in 2007, American Water continued to notch up wins on the military side. In September, the company scored a double victory, securing a $98 million 50-year water and wastewater O&M contract at the Fort A.P. Hill army installation in Virginia, as well as a $61 million 50-year O&M contract for a water distribution system at Scott Air Force Base, Illinois. While the headline dollar numbers for such deals may be eye-catching, the long duration of the contract period significantly reduces the annualised revenues. The big military prizes eluded American Water last year, however, as American States Utility Services (ASUS) picked up a $575 million 50-year water and wastewater O&M deal at Fort Bragg, NC, and a $143 million 50-year contract with similar scope at Fort Jackson, SC. American remains committed to the military market, however, and may have more success with the upcoming water and wastewater contract for Fort Meade, MD, which ranks as one of the largest joint service centres in the US.
Severn Trent Services
The focus of Severn Trent’s recent strategy has been to withdraw from unprofitable outlying contracts to concentrate on markets where it already has strength. It saw a small (3%) increase in revenues to $141 million in 2007. The company signed 40 new contracts during the year, taking the total number of municipalities served to 408.
Southwest Water Company’s area of coverage stretches from California across the sunbelt states to Georgia. Despite renewing 98% of its contracts and negotiating 49 new ones in 2007, the company saw its contract ops revenues drop by 4% last year. This was reflected in a 7.3% fall in the company’s share price last year. 62% of sales are from non-regulated water.